What is the term for the amount of depreciation that must be reported as ordinary income when property is sold at a gain?

The term for the amount of depreciation that must be reported as ordinary income when property is sold at a gain is depreciation recapture. This concept applies specifically to the sale of tangible depreciable assets, such as real estate or equipment, where the seller has taken depreciation deductions in prior years.

When a property is sold for more than its adjusted basis, which is the original cost minus any depreciation taken, the Internal Revenue Service (IRS) requires the seller to "recapture" some of that depreciation. This means that the portion of the gain that is attributable to depreciation is taxed as ordinary income rather than as capital gains. This treatment prevents taxpayers from benefiting from both the depreciation deduction and a reduced capital gains rate when they sell the asset for a profit.

Understanding depreciation recapture is essential for accurate tax reporting and planning, as it can significantly impact the overall tax liability from the sale of business or investment property.